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S&P move suggests telecom turnaround is official

Standard & Poor's upgrades debt ratings of two key makers of telecommunications equipment, highlighting what many equities analysts already knew: The sector is on the slow road to recovery.

Standard & Poor's Ratings Services has confirmed what many in the telecommunications sector have been saying for months: The worst of the downturn is over.

On Wednesday, S&P upgraded debt ratings for Lucent Technologies and Alcatel, two key makers of telecommunications equipment. Lucent's corporate rating jumped to a "B" from a "B-minus," and the outlook was revised to "positive" from "negative." The changed outlook means that if Lucent's financial situation were to change anytime soon, S&P believes it would change for the better. S&P also raised Alcatel's debt to "BB-minus" from a "B-plus."

"The industry is looking better than it has in a long time," said Bruce Hyman, a credit analyst for S&P. "We're seeing reasonable signs of growth, particularly in wireless technology."

Hyman also said he sees improved revenue in Asia and stabilization in the North American market as carriers begin to increase capital spending. But he was still cautious about the future.

"The sector may be out of the woods," Hyman said. "But there's still pretty dense shrubbery."

Some equities analysts said this is old news. Gabriel Lowy, director of technology research for Blaylock & Partners called the debt market a lagging indicator. The telecommunications equipment market bottomed out in the first and second quarter of 2003, he said. The sector turned the corner during the summer months and caught a tailwind in the fourth quarter as carriers spent what was left of their yearly budgets, which helped push revenue above expectations, he added.

"It's confirmation of what we already believed," Lowy said. "It's always better to see ratings go up rather than down, but it's not a reflection of a robust recovery."

In fact, Lowy said, the recovery is muted at best, and it's manifesting itself only in specific areas. Carriers are shifting capital spending from old circuit switched equipment that runs the traditional telephone network and instead are focusing spending on equipment that supports packet technology, like Internet Protocol.

Carriers are interested in buying gear that will help them deliver services more cost effectively. As a result, they want equipment that can handle multiple services. They're also focusing more on emerging technologies such as VoIP (voice over Internet Protocol) and wireless.

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A surprising omission from the upgrade list was Nortel Networks. Like Lucent, which was first downgraded in 2001, Nortel was hit hard by the telecommunications downturn. But over the past year, the company slashed spending and increased revenue, greatly improving its fundamentals. When it reported fourth-quarter results in January, the company blew past analyst expectations and reported a full year of profitability.

"Nortel is clearly outperforming the other two companies," Lowy said. "It's curious that they didn't upgrade them as well."

Nortel is currently rated at a "B."

Hyman explained S&P's rationale: "We recognize that, operationally, Nortel has made progress. But until the accounting investigation is resolved, we can't make a determination of whether or not they should be raised from a "B" rating."

Nortel announced during its third-quarter conference call in November 2003 that a review of the company's assets and liabilities had turned up errors in the books that would result in a restatement of the company's financial results for 2000, 2001, 2002 and the first two quarters of 2003. The company is still reviewing and restating these earnings.